“After closely watching several hundred companies that have failed, I observed that a very large number of these had solved the product/market fit problem, but still failed because they had not found a way to acquire customers at a low enough cost…”
David Skok, five times serial entrepreneur turned venture capitalist.
A growth engine is a beautiful thing. But as any other engine, it needs fuel to run. Every step has a cost. And with every step, you lose some prospects.
Let’s look at an example. Warning: if you don’t particularly like numbers, I still urge you to keep watching. You simply cannot build a viable growth engine without this basic understanding.
Imagine that your growth engine looks like this.
Visitors come to your landing page via articles on your blog, presentations on SlideShare and through Google AdWords. Each of these sources has a cost. Google AdWords is easy: the cost can be seen in your AdWords account. But a seemingly free sources have a cost too. They cost you your time or freelancer fees.
For the sake of this example, let’s say that on average, a visitor to your landing page costs $1.
In the next step, a percent of visitors sign up. Let’s say you have a conversion rate of 20% – in other words, out of 5 visitors, 1 signs up. You paid $5 for those 5 visitors (remember: a dollar per visitor). A cost of 1 signup is therefore $5.
In the next step, over a period of time, you send your subscribers several e-mails with nurturing content (day 3). However, not everyone is actively reading. Assume only half of signed up prospects are active. With a signup cost of 5, an active prospect then costs 10 dollars.
Remember the idea of day 3 – we are building relationship with these prospects, and our active prospects are responding. The system is working.
The active prospects are ready for your offer.
Say your offer is a free demo of your product. You create a dedicated landing page describing your product’s benefits, and write a compelling email to your active prospects. If you do this right, some prospects will respond and request the demo. After sending reminders to those who did not respond, you may also give them a call.
Imagine that 15% of active prospects agree to a meeting. In other words, you have to call 20 to get 3 appointments.
Let’s see how much those 3 appointments cost. At 10 bucks per active prospect, you have paid 200 to activate 20 prospects. But it also costs money to make phone calls. With 15 minutes per call, it takes 5 hours to call 20 prospects, or $250 (at 50 an hour). Therefore, 3 appointments cost 200 in acquisition, and 250 in calling, a total of 450. Or $150 per appointment.
Unfortunately, not everyone shows up to a meeting. Assume 80% eventually do. In other words, you need 5 appointments to get 4 meetings. 5 appointments costed $750 (150 each). Doing a meeting costs an additional 200 (assuming 4h to prepare, commute, attend and follow up). So those 4 meetings cost you 750 in scheduling plus 800 in effort. Or 387 dollars and 50 cents for a single meeting!
Assuming half of meetings result in an offer, that then takes 2h of work to prepare, your cost of an offer is 875. If 1 out of 3 offers gets accepted, a total cost of sales is 2.652 dollars!
Having lost prospects in each step also means that you need to get 505 visitors to your landing page to acquire a single customer.
You may find it difficult to believe you are spending this much money for each deal. Now, your growth engine may look differently – or you may be more efficient. For example, if you sell directly off your website, you spend less in travels and meeting people.
Or you may not take your time into account. But in fact, your time costs double: what you pay yourself AND the opportunity cost (time you could otherwise spend further developing your business). In addition, eventually, you want to be able to outsource some steps to your employees or third parties. Even with a cost of $35 per hour, your cost of sales is still 2K.
But how does this compare to offline lead generation? Consider these 2 scenarios.
To host a booth on a targeted trade show, you’ll easily spend 10K all inclusive (registration, booth, preparation, time…). You collect 84 business cards, and meet 12 hot leads. You call your 12 leads and schedule 6 meetings. You then add all 84 emails to your nurturing list, which in turn yield 6 extra meetings. From those meetings, taking the same success rate as before, you close 2 deals. This way, a deal costs more than 5K!
Scenario 2: you organize a workshop with 50 participants, spending $500 on venue and catering and 16 hours to prepare, promote and organize the event. You then email and call each participant, spending $625 on phone calls. Assuming the same success rate as before, a deal will cost you just under 2K.
What does this all mean? In B2B, you cannot disregard offline channels. Instead, build a portfolio of channels, and add offline prospects you cannot handle to your automated online nurturing process.
They may just thank you for it.
It also means that if you are serious about growth, you need to know your conversion rates and your cost of sales.
You also want to understand the following two numbers:
- The life time value of your customer – what you earn from a customer, over the complete business relationship
- Time to ROI – or time that it takes to recuperate the cost of sales. This metric is really important for your cash flow. It impacts the speed at which you can grow, and the requirement for a capital investment.
Moving your prospects through the funnel can be a slow and costly process. But there is also a flipside. Small improvements can quickly add up, and make great impact on your bottom line. But more on this tomorrow.